Global Business Activity Has Begun to Slow Due to Rising Energy Prices Driven by the War With Iran

The first purchasing managers’ indices since the outbreak of the conflict indicate that its effects are being felt from Europe to Australia—as Brent crude holds above $100 a barrel and global supplies of liquefied natural gas tighten.

Economists at Commerzbank note that the conflict “is leaving its first marks”.

In the eurozone, the private sector in March hovered on the brink of stagnation—the purchasing managers’ index (PMI) fell to 50.5, the lowest level in ten months, down from 51.9 in February and below the expected 51.

Activity in the currency bloc is holding only marginally above the 50 threshold that separates expansion from contraction.

According to Chris Williamson, an economist at S&P Global Market Intelligence, the eurozone data are “sounding stagflation alarm bells”—with prices rising sharply even as growth slows.

In the United States, business sentiment has also deteriorated, falling to an 11-month low of 51.4, amid a decline in new orders and rising prices driven by the war with Iran.

Industrial delivery times have lengthened to their highest level since October 2022.

At the same time, the US economy had already been showing signs of softening before the conflict began—the labour market had started to shed jobs after a prolonged period of steady growth.

In Australia, business activity returned to contraction territory for the first time in 17 months—the PMI fell from 52.4 in February to 47 in March—amid high inflation and concerns linked to the conflict in the Middle East.

“These flash estimates offer an initial insight into how the war in the Middle East has affected the global economy,” said S&P Global Market Intelligence economist Eleanor Dennison.

Meanwhile, UK manufacturers reported the sharpest rise in input costs since October 2022—the composite PMI fell to a six-month low of 51 in March, down from 53.7 previously.

In Japan, private-sector business activity also slowed—the index declined from 53.9 to 52.5, although both manufacturing and services remain in expansion territory.

The release of the surveys followed warnings from leading central banks last week that the war in the Middle East would intensify inflationary pressures.

The European Central Bank cut its 2026 growth forecast to 0.9%, down from 1.2% in December. In the event of prolonged disruptions to oil flows through the Strait of Hormuz, growth could slow to as low as 0.4%, the ECB said.

In any scenario, the immediate impact on inflation would be “material,” ECB president Christine Lagarde warned on Thursday.

Federal Reserve chair Jerome Powell said last week that in the near term “higher energy prices will push up overall inflation” in the United States, while cautioning that it is still too early to assess the scale and duration of these effects on the economy.

The Bank of England also warned that a severe energy shock could feed through into wages and prices across the economy, leaving open the possibility of interest rate increases.

Since US and Israeli strikes on Iran began on February 28, traders have sharply revised their expectations for the path of interest rates in the world’s largest economies.

In the eurozone, markets are now pricing in more than two 0.25-percentage-point rate increases by the end of the year, on the assumption that the ECB will respond to rising energy prices more swiftly than in 2022, when Russia’s full-scale invasion of Ukraine triggered a surge in oil and gas prices and pushed annual inflation to nearly 11%.